Fin 550

----------------------------------------------------------------------------------------Chapter 4 2) Lauren has a margin account and deposits $50,000. Assuming the prevailing margin requirement is 40 percent, commissions are ignored, and The Gentry Shoe Corporation is selling at $35 per share: a. How many shares of Gentry Shoe can Lauren purchase using the maximum allowable margin? Prevailing Margin Requirement 40% = 40/100 = 0.4 Deposit = $50,000 Each Share Price = $35 Total Investment

50000 = 0.4x X = 50000/0.4 = $125,000

Lauren can purchase

125000/35 = 3571.42 = 3571 shares

b. What is Lauren’s profit (loss) if the price of Gentry’s stock (1) rises to $45? On a simple math the share price went up by 10$ from earlier, we can say No of shares x 10 = 3571x10 = $35710 With share price rise from $35 to $45 Or by theory Fund = (35*3571)-50000 = $74,985 Investment = 3,571 shares x $45 = $160,695 Lauren's Profit = $160,695 - $74,985 - $50,000 = $35,710 (2) Falls to $25? On a simple math the share price loses by 10$, we can say No of shares x 10 = 3571x-10 = $-35710 Fund = (35*3571)-50000 = $74,985 Investment = 3,571 shares x $25 = $89,275 Lauren's Loss = $89,275 - $74,985 - $50,000 = ($-35,710)

c. If the maintenance margin is 30 percent, to what price can Gentry Shoe fall before Lauren will receive a margin call? Price Gentry shoe can fall before receiving a margin call = 35 * 0.6 / 0.7 = $30

Chapter 6 Question 22 At a social gathering , you meet the portfolio manager for the trust department of a local bank. He confides to you that he has been following the recommendations of the department's six analysts for an extended period and has found that two are superior, two are average, and two are clearly inferior. What would you recommend that he do to run his portfolio. The portfolio manager can trade the quantity he desires when he desires at a price not worse than the uninformed expected value. He can rely on all of the six analysts to a certain extent as long as he needs to attain, making himself sensitive to three dimensions of liquidity: price,timing, and quantity. Deviations from perfect liquidity in any of these dimensions impose shadow costs on the portfolio manager. By focusing on the trade-off between sacrificing on price and quantity instead of the canonical price-time trade-off, the model yields several novel empirical implications. Understanding a portfolio manager’s liquidity considerations provides important insights into the liquidity of many assets and asset classes. 2. Compute the abnormal rates of return for the five stocks in problem 1 assuming the following systematic risk measures (betas) Stock B F T C E

Bi 0.95 1.25 1.45 0.70 -0.30

Stock B F T C E

Rit 11.5% 10.0 14 12 15.9

Rmt 4.0% 8.5 9.6 15.3 12.4

By using the formula AR(it) = R(it) – E(R(it)) Stock B = 11.5 – (4.0*.95) = 7.7% Stock F = 10.0 – (8.5*1.25) = -0.625%

Bi 0.95 1.25 1.45 .70 -0.30

Stock T = 14.0 – (9.6*1.45) =0.08% Stock C = 12.0 – (15.3*.70) =1.29% Stock E = 15.9 – (12.4*(-.30)) =19.62% The difference in abnormal rates shows how the stocks has performed. Stocks B, T, C and E performed well when compared with Stock E. Stock F performed with negative rate of return